Questioner 5: I would first like to congratulate and thank the board for the great performance in the FRMO stock in the last two or three years. Also, I would be remiss if I did not ask Murray and Steve for the third year in a row for a couple of ideas on stocks that pique your interest. But first, I would like to ask you about Sears (SHLD, Financial). I discovered the stock many years ago thinking that it was the next Alexander’s with all of the land and property that it owns. A good friend of mine is a commercial real estate agent in Westchester County, which is one of the more affluent counties in the country, and he tells me about the year’s worth of inventory on commercial properties. At this point with Sears, my concern would be that many of its commercial properties are around parts of the country that are not doing as well as the major cities in the Northeast. I’d like to get your insight on that and possibly why you are accumulating the shares over time.
Steven Bregman: I have yet to meet a realtor or someone familiar with commercial real estate who likes Sears. In fact, I have yet to meet anybody who likes Sears. If I were not an analyst and I simply based my assessment of Sears upon my own personal experience with a Sears store such as exist in Westchester, I might share the same opinion.
All that has changed in my assessment of Sears over the years is that Mr. Lampert’s rearrangement of the corporate balance sheet and various actions he has taken and brought about, year by year, have confirmed my initial impression, which I hope is not incorrect, which was that the value of the assets they own is many multiples above the current share price.
Our first assessment of Sears was the kind that we often have to make in the world of public equities when there is a lot of data we do not have. You are making decisions with imperfect and incomplete information, and you can make some educated attempts at analysis about how many stores they own and what the square footage is and so on, what the replacement value might be or not. Even on the basis of some very crude estimates like that, and there are different ways to go about it, it seemed to us that the real estate, even without any other assets, was worth a lot more than the common stock market value. We were ascribing no value to other assets they own such as some of the brands like Craftsman and Kenmore. Over the years we have collected a little bit more information about those brands. For instance, it turns out Mr. Lampert is willing to monetize them. We find that he is altering the structure of the company; he has changed it in a way such that you find out that the mostly owned real estate, as opposed to the leased real estate, is bankruptcy remote, as are the brands themselves. In addition, substantially all of the debt is secured by what you might consider the less valuable assets. He is treating Sears more like a long-term holding company than not.
All of these observations, and there are more, were subsequent to our initial assessment. Then, of course, he does things like buy several hundred million dollars’ worth of stock at the end of last year when the shares were down a lot. At least it confirms, presumably, what his own assessment is for the company.
There has been a lot more positive confirmation along the way in terms of what people observe different properties might be worth or where they think the inventory is for commercial real estate. That can change a lot, and it depends on the person who makes that assessment. Do they pay attention to what clearing prices might be in five years? Mr. Lampert seems to be playing a very long game. We will find out ultimately what is going on.
I also think about that which I do not know. Sometimes you can conceptually ascribe value to things you do not know. For instance, if you have 1,000 properties, think of it like a 1,000-piece chess set. Out of all those properties there must be at least one store that is moribund, that is hardly worth anything as a store, but that might be on the right corner or near the right interstate exit, that wants to be a 40-story mixed use office/apartment complex, in other words, be repurposed. That one location could be worth hundreds of millions of dollars. There could be more than one. We do not know.
From watching Mr. Lampert operate from a distance I suspect he knows every single property. He has a lot more information than I do. When someone puts an additional $500 million of his own money into a company, unless he is governed purely by some kind of emotional or ego problem or is really not a good analyst, you have to suspect that there is information content in that. I do not worry very much about it, though I am not totally complacent when I observe it and assess it.
Murray and I review all these investments regularly. When we last discussed Sears, we were in agreement again. We asked, "Are we missing something? Are we wrong? Is there a risk?" There is more of a portfolio risk, not a valuation risk. There is a possibility of, let’s say, a take under. What if one day Mr. Lampert comes in and the stock has been sinking and he makes a magnanimous gesture to offer a price well above the prospective best price, which is lower even than it is today? There might be a fuss and a back and forth and he would grudgingly offer a higher price, but basically you lose, right? It is a possibility. I cannot know, but I am not so sure I give it a high probability of happening because it is in the ultimate owner’s best interest to have a publicly traded share. There is flexibility in a publicly traded stub. There is indication of public market desire. There is the ability to quickly and easily make use of higher valuations, which is to say a lower cost of capital, and so forth. That is the biggest risk I personally feel about it. I do not know if you have any other observations.
Murray Stahl (Trades, Portfolio): Just a minor point. Sears Holdings is held in many accounts. You might not know it, but if you are in the securities lending programs, Sears is actually the highest yielding stock that we have in the portfolio, because we lend it out and they pay us interest on it. 7.5% is the latest rate and it has been higher.
Steven Bregman: It has been as high as 20%.
Murray Stahl (Trades, Portfolio): Basically, the more negative people feel about it, the higher the rate is. So, it is an equilibrium of sorts.
Source: FRMO Corporation Annual Meeting of Shareholders Transcript (August 26, 2014)
